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Optimal second best taxation of addictive goods in dynamic general equilibrium: a revenue raising perspective

Bossi,Luca, Gomis-Porqueras,Pedro and Kelly,David L 2014, Optimal second best taxation of addictive goods in dynamic general equilibrium: a revenue raising perspective, B.E. Journal of macroeconomics, vol. 14, no. 1, pp. 75-118, doi: 10.1515/bejm-2013-0099.

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Title Optimal second best taxation of addictive goods in dynamic general equilibrium: a revenue raising perspective
Author(s) Bossi,Luca
Gomis-Porqueras,Pedro
Kelly,David L
Journal name B.E. Journal of macroeconomics
Volume number 14
Issue number 1
Start page 75
End page 118
Total pages 44
Publisher Walter de Gruyter GmbH
Place of publication Berlin, Germany
Publication date 2014-01
ISSN 2194-6116
1935-1690
Keyword(s) addictive goods
dynamic optimal taxation
habit formation
Ramsey model
Social Sciences
Economics
Business & Economics
RATIONAL ADDICTION
EMPIRICAL-ANALYSIS
ALCOHOL ADDICTION
PANEL-DATA
SIN TAXES
CONSUMPTION
INFLATION
MODEL
BEHAVIOR
SMOKING
Summary In this paper we derive conditions under which optimal tax rates for addictive goods exceed tax rates for non-addictive consumption goods within a rational addiction framework where exogenous government spending cannot be financed with lump sum taxes. We reexamine classic results on optimal commodity taxation and find a rich set of new findings. Two dynamic effects exist. First, households anticipating higher future addictive tax rates reduce current addictive consumption, so they will be less addicted when the tax rate increases. Therefore, addictive tax revenue falls prior to the tax increase. Surprisingly, the optimal tax rate on addictive goods is generally decreasing in the strength of tolerance, since strong tolerance strengthens this tax anticipation effect. Second, high current tax rates on addictive goods make households less addicted in the future, affecting all future tax revenues in a way which depends on how elasticities are changing over time. Classic results on uniform commodity taxation emerge as special cases when elasticities are constant and the addiction function is homogeneous of degree one. Finally, we also study features of addictive goods such as complementarity to leisure that, while not directly related to the definition of addiction, are nonetheless properties many addictive goods display.
Language eng
DOI 10.1515/bejm-2013-0099
Field of Research 140207 Financial Economics
Socio Economic Objective 910208 Micro Labour Market Issues
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2014, Walter de Gruyter GmbH
Free to Read? Yes
Persistent URL http://hdl.handle.net/10536/DRO/DU:30068177

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Every reasonable effort has been made to ensure that permission has been obtained for items included in DRO. If you believe that your rights have been infringed by this repository, please contact drosupport@deakin.edu.au.